Drawdown
Spending down your portfolio in retirement, including the order you pull from taxable, traditional and Roth accounts; also a peak-to-trough market decline.
Peak-to-trough drawdown = (Peak value − Low value) ÷ Peak value
Explanation
In retirement planning, drawdown usually means the phase when you stop adding money and start withdrawing it. Because different accounts are taxed differently, the order you draw from matters:
- Taxable brokerage: only the gain portion of a sale is taxed, often at long-term capital gains rates, which can be 0% at lower incomes.
- Traditional 401(k)/IRA: every dollar is ordinary income. Early-access rules and penalties apply before 59½.
- Roth: tax-free when qualified, and leaving it to grow longest is often valuable.
- HSA: tax-free for medical costs.
A common default is taxable first, then traditional, then Roth. Many plans do better by blending: taking just enough from traditional accounts (or converting to Roth) each year to fill the standard deduction and low brackets, and covering the rest from taxable or Roth money. This can reduce later RMDs and smooth taxes over your lifetime. Access rules (59½, Rule of 55, 72(t), Roth ladder) also shape the order for early retirees.
The word has a second meaning in investing: a drawdown is a decline from a portfolio’s peak to its low point, usually expressed as a percentage. A “maximum drawdown” is the largest such fall over a period. Large drawdowns early in retirement are what sequence-of-returns risk is about.
In scenarios, you can choose a withdrawal order or let the app fill brackets each year. Results show which accounts funded each year’s spending and the taxes that followed.
Example
Withdrawal order. A married couple, both 62, needs $70,000 in 2026. They take:
- $32,200 from a traditional IRA, exactly offset by the $32,200 standard deduction, so ordinary taxable income is $0
- $37,800 from a taxable account, of which half ($18,900) is long-term gain
Their only taxable income is the $18,900 gain, well under the $98,900 top of the 0% rate. Federal income tax: $0 on $70,000 of spending.
Market drawdown. A portfolio falls from $1,000,000 to $650,000: ($1,000,000 − $650,000) ÷ $1,000,000 = 35%. To get back to $1,000,000 it must gain $350,000 ÷ $650,000 = 53.8%.